IRS Announces Key Estate and Gift Tax Exemptions for 2018

by Mitchell Silberberg & Knupp LLP
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Mitchell Silberberg & Knupp LLP

On October 19, IRS issued Revenue Procedure 2017-58, announcing inflation adjustments for 2018 for dozens of important figures across the Internal Revenue Code, including the following two key numbers regarding the estate tax, gift tax and generation-skipping transfer (GST) tax:

1.       Gift Tax Annual Exclusion Increases to $15,000. For gifts made in 2018, the gift tax annual exclusion will be $15,000.  This is the amount an individual can give to as many donees as desired in one year without using any of the donor’s estate and gift tax exemption.  The best way to think about this is that a person can stand on the street corner and give $15,000 to every person who passes by, and the donor will not use any of his or her estate and gift tax exemption.

This also means that a married couple can give each donee up to $30,000 in 2018 without using either spouse’s estate and gift tax exemption amount.

The annual exclusion had been stuck at $14,000 since 2013.  Even though the annual exclusion is indexed for inflation, under the Congressional version of rounding (not the one you learned in elementary school), the annual exclusion does not get rounded up to the nearest $1,000, it only gets rounded down.  Thus, the inflation adjustment must actually push the annual exclusion past the next $1,000, which explains how it can take five years for the annual exclusion to increase.

2.       Estate Tax/Gift Tax/GST Tax Exemption Increases to $5,600,000. For decedents dying in 2018, and for gifts made during 2018, the combined estate and gift tax exemption will increase to $5,600,000 from its current $5,490,000.  This also increases the GST exemption to $5,600,000.  Among other things, this means that with proper planning, a married couple can pass at least $11,200,000 of their combined net worth to their children without estate tax.

Of course, this assumes that the estate tax and GST tax remain in effect after 2017.  The estate planning world is holding its breath waiting to see if “tax reform” actually passes Congress.  While no text of an actual bill has yet been released, the “framework” for tax reform states that the “death tax” and the GST tax would be repealed.  No one knows if this means gradually, or as of 1/1/2018.  Already, some Senators have commented that the estate tax repeal may not be politically possible, given the estate goal of tax reform to benefit the middle class exclusively, or nearly exclusively.

Moreover, the “framework” leaves the gift tax in place, without indicating whether the GST tax (which applies both to lifetime gifts and testamentary transfers) would be repealed with respect to all transfers, or just testamentary transfers.

In other words, stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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